The problem with European champions
27 September 2019
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Lifestyle Economics
Society and Culture
1 October 2019
Labour Market
Free-market liberals will have shuddered at the news that European Commission officials have drawn up far-reaching plans for a new €100 billion fund to promote European technology giants.
The 173-page document bemoans the lack of European competitors to American and Chinese titans such as Google, Facebook, Alibaba and Tencent. The wishlist calls for direct funds to foster European “industrial champions” and new state aid exemptions so that member states can help their own ones.
Much of the press coverage has decribed the proposals as a “sovereign wealth fund”. This is misleading: typically, sovereign wealth funds are financed by fiscal surpluses and vast foreign exchange reserves originating from commodity export revenues, especially oil. They are established so that current, transient prosperity emanating from these sources is not squandered by present spending, but rather invested in the future.
By contrast, the proposed European fund would be financed in part from the private sector and in part from the EU’s budget, which has no vast surplus. Rather than maximise investment returns, it will overtly champion a domestic industrial policy. It is better described a state investment fund, not a sovereign wealth fund.
More to the point, the fund panders to the populist notion of “national champions” – large for-profit corporations that are expected to promote the political interests of the government in which they are domiciled; and that are in turn the beneficiaries of favourable government policies and widespread patriotic worship.
The philosophy of national champions is anathema to market competition. The state is rarely better than the market at guessing future winners. Often, state grants to national champions squander taxpayers’ money on inefficient and bloated companies, taking capital away from entrepreneurial start-ups that would otherwise thrive.
Take Britain’s ruinous policy of promoting inefficient national champions in the 1970s, including Alfred Herbert, British Leyland and International Computers Limited. When the policy was abandoned in the 1980s, after generous but ineffective grants and costly nationalisations, productivity improved because competitive pressures increased and chronic overstaffing was alleviated. Or think of Quaero, a Franco-German search engine. In 2008, the project received €99 million of French taxpayers’ money. Within six years, it gave up its struggle to compete with Yahoo and Google.
National champions also nurture unhealthy relations between government and big business. Governments stifle competition in order to protect their pet companies, especially through import tariffs and favourable regulations. The companies play a role in setting these regulations themselves: the Boeing 737 Max scandal revealed Boeing’s influence over safety approvals in America. In turn, national champions serve political goals to maintain political favour, such as through overstaffing or expanding internationally in strategic locations. Consumers and taxpayers foot the bill through wasteful spending, higher prices and lower-quality goods.
Aside from creating national champions, in a striking endorsement of protectionism, the proposed fund goes on to call for higher unilateral tariffs on the United States, interdictions on tendering to Chinese companies subsidised by Beijing and more trade barriers against countries with lower environmental standards.
It will be Europeans paying for all this. When foreign ownership or competition can provide higher-quality products at a lower price, it hurts domestic consumers (and disproportionately the poorest) to close one’s doors to trade.
In any case, “foreign ownership” can be an elusive concept. Multinational companies have assets and interests across the world, not just the country in which they are domiciled. Their ownership typically derives from a complex, interconnected web of contractual agreements between shareholders, directors, managers and others, often from nationalities all over the world. Inviting foreign ownership should not be seen as compromising one’s nation, least of all when it can enrich it.
For its part, the EU may promote a tech-friendly Europe without resorting to the short-sighted and expensive populism of a state investment fund. It could, for example, promote business-friendly regulations. It is no surprise that Sweden and the UK, the member states scoring highest on the ease of doing business index after Denmark, have the most vibrant technology sectors in Europe, boasting companies such as JustEat, ASOS, Ericsson and Spotify.
As regulators discovered through the experience of GDPR, complex and cumbersome regulations – which only the largest companies have the expertise and money with which to comply – tend to bolster market incumbents to the detriment of new innovators.
There is hope that the plans won’t come to fruition. The transition team of the new Commission, which begins in November, has publicly denied all knowledge of the plans, while the outgoing Commission downplayed the memo as “draft internal brainstorming documents”. Even with relatively fiscally-prudent Britain out of the EU, other member states, which may have to ratify the plans, are likely to object to the proposals, with Finland already having signalled its opposition to new protectionist measures.
This article was originally published on the Epicenter blog.
The 173-page document bemoans the lack of European competitors to American and Chinese titans such as Google, Facebook, Alibaba and Tencent. The wishlist calls for direct funds to foster European “industrial champions” and new state aid exemptions so that member states can help their own ones.
Much of the press coverage has decribed the proposals as a “sovereign wealth fund”. This is misleading: typically, sovereign wealth funds are financed by fiscal surpluses and vast foreign exchange reserves originating from commodity export revenues, especially oil. They are established so that current, transient prosperity emanating from these sources is not squandered by present spending, but rather invested in the future.
By contrast, the proposed European fund would be financed in part from the private sector and in part from the EU’s budget, which has no vast surplus. Rather than maximise investment returns, it will overtly champion a domestic industrial policy. It is better described a state investment fund, not a sovereign wealth fund.
More to the point, the fund panders to the populist notion of “national champions” – large for-profit corporations that are expected to promote the political interests of the government in which they are domiciled; and that are in turn the beneficiaries of favourable government policies and widespread patriotic worship.
The philosophy of national champions is anathema to market competition. The state is rarely better than the market at guessing future winners. Often, state grants to national champions squander taxpayers’ money on inefficient and bloated companies, taking capital away from entrepreneurial start-ups that would otherwise thrive.
Take Britain’s ruinous policy of promoting inefficient national champions in the 1970s, including Alfred Herbert, British Leyland and International Computers Limited. When the policy was abandoned in the 1980s, after generous but ineffective grants and costly nationalisations, productivity improved because competitive pressures increased and chronic overstaffing was alleviated. Or think of Quaero, a Franco-German search engine. In 2008, the project received €99 million of French taxpayers’ money. Within six years, it gave up its struggle to compete with Yahoo and Google.
National champions also nurture unhealthy relations between government and big business. Governments stifle competition in order to protect their pet companies, especially through import tariffs and favourable regulations. The companies play a role in setting these regulations themselves: the Boeing 737 Max scandal revealed Boeing’s influence over safety approvals in America. In turn, national champions serve political goals to maintain political favour, such as through overstaffing or expanding internationally in strategic locations. Consumers and taxpayers foot the bill through wasteful spending, higher prices and lower-quality goods.
Aside from creating national champions, in a striking endorsement of protectionism, the proposed fund goes on to call for higher unilateral tariffs on the United States, interdictions on tendering to Chinese companies subsidised by Beijing and more trade barriers against countries with lower environmental standards.
It will be Europeans paying for all this. When foreign ownership or competition can provide higher-quality products at a lower price, it hurts domestic consumers (and disproportionately the poorest) to close one’s doors to trade.
In any case, “foreign ownership” can be an elusive concept. Multinational companies have assets and interests across the world, not just the country in which they are domiciled. Their ownership typically derives from a complex, interconnected web of contractual agreements between shareholders, directors, managers and others, often from nationalities all over the world. Inviting foreign ownership should not be seen as compromising one’s nation, least of all when it can enrich it.
For its part, the EU may promote a tech-friendly Europe without resorting to the short-sighted and expensive populism of a state investment fund. It could, for example, promote business-friendly regulations. It is no surprise that Sweden and the UK, the member states scoring highest on the ease of doing business index after Denmark, have the most vibrant technology sectors in Europe, boasting companies such as JustEat, ASOS, Ericsson and Spotify.
As regulators discovered through the experience of GDPR, complex and cumbersome regulations – which only the largest companies have the expertise and money with which to comply – tend to bolster market incumbents to the detriment of new innovators.
There is hope that the plans won’t come to fruition. The transition team of the new Commission, which begins in November, has publicly denied all knowledge of the plans, while the outgoing Commission downplayed the memo as “draft internal brainstorming documents”. Even with relatively fiscally-prudent Britain out of the EU, other member states, which may have to ratify the plans, are likely to object to the proposals, with Finland already having signalled its opposition to new protectionist measures.
This article was originally published on the Epicenter blog.
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It is fair to say that national industrial policies have acquired a bad reputation because all this talk about creating and protecting national champions, and picking winners, has only diverted attention from the most pressing issue for businesses in the European Union – how to deal with the problem of lack of competitiveness in both, the single market and in global markets.
Time and again, this government has made it absolutely clear that it would like see the competitiveness of British industry improved significantly, both in the domestic and export markets, so that the UK can pay its way in the world, post-Brexit. This central objective is unlikely to change, irrespective of a deal or no-deal outcome on 31st October 2019.
The problem with intervening in the market with public funds is that, the decision to do so is in the hands of elected politicians who are highly susceptible to cronyism – the nexus between the governing elite and the business elite that contrives to put the interests of business first, ahead of the wants, needs and expectations of ordinary citizens. This is because the twin evils of lobbying and corruption rear their ugly heads every time taxpayers’ money crosses the boundary between the Public Sector and the Private Sector.
It is, as the economist Randall Holcombe puts in his book Political Capitalism a “system in which the economic and political elite cooperate for their mutual benefit.” The political elite tilt the economic playing field in favour of the economic elite, privileging them through subsidies, regulatory protections and targeted tax breaks. In exchange, the economic elite then help to ensure that the political elite remain in power. The rest of us pay the bill for this quid pro quo through higher taxes, higher prices, and a less efficient, less dynamic economy.
On the other hand, it is right to say that the job of government is to foster an environment which causes the Private Sector to innovate, grow, create jobs and make a profit. It is not the job of government to create jobs.
It is the misinterpretation of this responsibility, on the part of some well-meaning people that has persuaded them to support the idea of an Industrial Strategy, which entails the government intervening in the market with public funds, to stimulate economic activity, boost productivity and export-led growth.
However, this means that people in the pay of the State get to choose which industry sector receives the subsidy, and which does not – leaving them exposed to the charge of favouring the privileged few at the expense of the many, and also skewing the market in favour of the same selected few, for decades to come.
Additionally, there exists an extremely high risk that public funds committed in this way will not deliver the return on investment as advertised, or worse still, squandered altogether because:
(a) Civil servants in Whitehall who are charged with negotiating the contract details are ill-equipped to deal with the Private Sector, which means that they will be duped into spending taxpayers’ money on poorly conceived projects – only for this to come to light years later, when some Select Committee of the House of Commons produces a report on its findings.
(b) The internal business process used to select recipients for state support is susceptible to manipulation and distortion by parliamentary lobbyists in the pay of those Private Sector players who can afford to spend the most.
(c) It is certain that the final decision on the choice of recipients, which is in the hands of the governing elite will be made, not in the national interest but to serve the interests of career politicians.
So, until these fundamental problems are addressed and dealt with, this government should be wary about intervening in the market with public funds.
@JagPatel3